NEWYORK
BlackRock and JPMorgan Asset Management are cutting US fixed-income exposure and rotating into emerging market local-currency debt as US credit spreads compress to 30-year lows, eliminating the relative value case for domestic bonds.
Rick Rieder, BlackRock's global fixed-income chief investment officer, began reducing positions in US investment-grade and high-yield bonds in February 2026, citing superior real yields in EM markets and an expectation of dollar depreciation. JPMorgan Asset Management's Bob Michele has signaled a similar preference, moving away from hard-currency debt into EM local currencies on the bet that the dollar continues to weaken.
BlackRock formalized the shift in its July 2026 mid-year outlook, upgrading EM local-currency debt to a small overweight while moving equities and hard-currency debt to neutral. The move reflects a calculated bet on continued Fed rate cuts and dollar weakness—dynamics that drove EM local government bonds to 15 percent-plus returns in 2025 and attracted over $60 billion in inflows to EM funds during that year.
US credit spreads at 30-year lows have narrowed the case for staying domestic. With nominal yields compressed and real yields unattractive relative to EM opportunities, the spread differential now favors emerging markets for yield-hungry institutions.
The rotation carries significant execution risk. JPMorgan CEO Jamie Dimon warned in April 2026 that persistent US deficits and geopolitical tensions could trigger a bond market crisis. A sharp move higher in US rates would likely reverse the EM thesis: higher rates strengthen the dollar, destroying the currency carry trade that underpins EM local-currency returns. In September 2026, when market pricing shifted to roughly 70 percent odds of a Fed rate hike, EM bonds sold off sharply.
Geopolitical volatility—particularly tensions in the Iran conflict—adds execution risk. Capital flight from emerging economies to the perceived safety of US Treasuries during periods of heightened uncertainty could quickly unwind the positioning.
The dollar trajectory remains the make-or-break variable. If the greenback strengthens, paper yields in EM local debt become irrelevant; foreign exchange losses will overwhelm the carry. That directly challenges Rieder's explicit thesis for sustained dollar weakness.
